2016 (6) TMI 244 - AT - Income Tax

Tribunal overturns Section 40A(3) addition, upholds CIT(A)'s decisions on Ahata income, sales suppression

The Tribunal allowed the appeal of the assessee, deleting the addition under Section 40A(3) of the Income-tax Act, 1961. The CIT(A)'s deletion of ... Addition invoking the provisions of section 40A(3) - elaborate submissions were made to prove that the expenses incurred in cash were genuine which were paid to distilleries through the Excise Department for purchase of liquor and there were practical expediency because of which the payments have to be made in cash - Held that:- Each person has licence in his own name to make the sales and purchases as per the terms of these licence agreements. Further, it is quite a known fact that in the business of the liquor, transactions are to be done in cash. All these facts have not been controverted by the Assessing Officer or even by the learned Commissioner of Income-tax (Appeals). This makes out a case that the assessee has business expediency under which it have to make payments in cash. Further, not a single transaction has been questioned at any stage. The learned Commissioner of Income-tax (Appeals) while adjudicating the contention of the assessee with regard to the genuineness himself has held that it is not sufficient for the assessee to establish that the payments were genuine and the parties were identifiable. He was of the view that the assessee is further required to prove that due to exceptional and unavoidable circumstances as provided under the Rules, the payments were made in cash. Therefore, it is not a case of the Department that the payments so made in cash were not genuine. The reasons given by the assessee at every stage have not been disbelieved. Since these reasons are correct, they really make out a case of business expediency. In this view, respectfully following the judgment of the hon'ble Punjab and Haryana High Court in the case of Gurdas Garg (2015 (8) TMI 569 - PUNJAB & HARYANA HIGH COURT ), we hold that the payments cannot be disallowed under section 40A(3) of the Act. - Decided in favour of assessee Addition with regard to ahata income - Held that:- No infirmity in the order of the learned Commissioner of Income-tax (Appeals) as regards ahata income. The Assessing Officer nowhere in his assessment order, nor in the remand report controverted the fact that for running ahata one has to take licence from the excise authority. Neither the Assessing Officer has placed on record any material to show that the assessee has taken this licence or in fact, the assessee is running the ahata. In this view, making addition on account of ahata income on estimate basis that too, comparing the case of the assessee with that of another assessee is not correct. The action of the learned Commissioner of Income-tax (Appeals) in deleting the addition is found to be as per law. - Decided in favour of assessee Addition on account of suppression of sales - Held that:- No infirmity in the order of the learned Commissioner of Income-tax (Appeals) since it is a common fact that in the liquor business, transactions are done through cash. We observe that the Assessing Officer has though proposed to reject the books of account but has not given any finding as to the rejection of the books of account of the assessee. He has not been able to pinpoint any instance of suppression of sales and only on the basis of suspicion, he has made the addition, that too on the estimated basis. These reasons are not enough to make such an addition. In this view, we confirm the order of the learned Commissioner of Income-tax (Appeals) in deleting the addition - Decided in favour of assessee Issues Involved:1. Addition under Section 40A(3) of the Income-tax Act, 1961.2. Disallowance of Ahata Income.3. Addition on account of Suppression of Sales.Issue-wise Detailed Analysis:1. Addition under Section 40A(3) of the Income-tax Act, 1961:The primary issue in the assessee's appeal was the addition of Rs. 7,91,05,385 made by the Assessing Officer (AO) under Section 40A(3) of the Income-tax Act, 1961. The AO noted that the assessee, a partnership firm dealing in liquor, made cash payments exceeding Rs. 20,000 in a single day to various parties. The AO rejected the assessee's explanation that the payments were made vend-wise and that they couldn't open a bank account due to the number of partners. The AO concluded that these payments were made on behalf of the firm and disallowed the expenditure under Section 40A(3).The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the firm's lack of a bank account did not absolve it from the requirements of Section 40A(3), and payments by different partners could not be considered independently. The CIT(A) also ruled out the applicability of Rule 6DD(b) and (g) of the Income-tax Rules, 1962, as the payments were not made to government undertakings or in areas without banking facilities.Upon appeal, the Tribunal considered the genuineness of the transactions and the business expediency. The Tribunal referenced the Punjab and Haryana High Court's judgment in Gurdas Garg v. CIT (Appeals), which held that if the genuineness of transactions is not questioned and business expediency is established, Section 40A(3) should not apply. The Tribunal found that the assessee had demonstrated business expediency and that the transactions were genuine. Thus, the addition under Section 40A(3) was deleted, and the assessee's appeal was allowed.2. Disallowance of Ahata Income:The AO noted that the assessee did not show any Ahata income and estimated an income of Rs. 6,40,000 based on a comparison with a sister concern. The assessee contended that it had not deposited any Ahata fee and had no Ahata income. The CIT(A) deleted the addition, noting that the AO's estimate was without specific evidence and that the assessee had not taken a license for running Ahata.The Tribunal upheld the CIT(A)'s decision, stating that the AO did not provide any material evidence to show that the assessee had taken a license or was running Ahata. Therefore, the addition based on an estimate was not justified, and the ground of cross objection by the Revenue was dismissed.3. Addition on account of Suppression of Sales:The AO observed significant variation in profit margins across different vends and estimated an addition of Rs. 20 lakhs for suppression of sales. The assessee argued that the books of account were audited and maintained properly, and the variation in profit margins was due to geographical and locational differences of the vends.The CIT(A) deleted the addition, stating that the AO's addition was based on conjectures and surmises without pinpointing any specific instance of suppression of sales. The Tribunal agreed with the CIT(A), noting that the liquor business typically involves cash transactions and that the AO did not provide sufficient reasons or evidence to justify the addition. Consequently, the ground of cross objection by the Revenue was dismissed.Conclusion:- The appeal of the assessee was allowed, deleting the addition under Section 40A(3).- The cross objection and appeal filed by the Revenue were dismissed, upholding the CIT(A)'s deletion of additions for Ahata income and suppression of sales.- The judgments emphasized the importance of genuineness and business expediency in determining the applicability of Section 40A(3).